Wednesday, March 14, 2007

Global Warming, Carbon Taxes, and Public Choice

In earlier posts I argued that global warming is probably real, probably anthropogenic, and will probably impose real but not catastrophic, costs. This raises an obvious question: What, if anything, should we do about it?

If I were dictator of the world, the answer would be fairly obvious. Impose a tax on activities that create greenhouse gases designed to reflect the marginal cost they create. That's the standard economic solution, due to Pigou, for problems of negative externalities. Since the tax brings in additional revenue, combine it with a corresponding reduction in whatever taxes currently have the largest adverse effects.

I do not, in fact, support such carbon taxes. The reason is that I do not believe that, if imposed, they would fit the pattern described above.

To begin with, they would not be based on a realistic estimate of the marginal costs; insofar as they would be based on anything, judging by the ongoing arguments over Kyoto and similar proposals, they would be based on some target level of emissions. If, as seems likely, the level of taxes needed to substantially slow global warming was much higher than the marginal damage done, the result would be to buy lower temperature at a price much higher than it was worth, making the net situation worse, not better.

I offer as further evidence the arguments I have been having over at Brian's "Backseat Driving" blog with people who are absolutely convinced that global warming would have catastrophic consequences but curiously unwilling to support that conviction with anything more than handwaving arguments. Judging by casual observation, they are the norm, not the outliers, of their movement.

Furthermore, I think it unlikely that income from carbon taxes would be used to reduce other taxes. The clear evidence here is the repeated pattern with regard to wars. New taxes are introduced as an emergency measure for a war, retained long after the war is over; there is always some politically profitable way to spend the money. In the case of carbon taxes, I am confident that they would be used as an additional source of revenue, perhaps with the argument that the money was needed to ameliorate the effects of whatever global warming continued to occur.

Finally, I suspect that widespread acceptance of the catastrophist view of global warming would result in quite a lot more than carbon taxes. It would provide a new justification for politically motivated interferences in a wide range of human activities. Anyone who questioned such policies would be labelled a denialist, accused of wanting Bangladeshis to drown and African children to starve. Again, look at the ongoing exchanges on Brian's blog.

Hence I conclude that serious efforts to combat global warming would have large costs, costs justified only if there were good reason to be confident that not taking such efforts would have catastrophic effects.

For the benefit of Brian and his friends, I think it might be useful to clarify the relevant terminology, as deduced from their and my usage:

Denialist: (1) Someone who refuses to accept the current scientific evidence on the existence and causes of global warming.

Denialist: (2) Someone who refuses to reject the current scientific evidence on the likely future scale of the effects of global warming.

Catastrophist: Someone who rejects the current scientific evidence on the likely future scale of the effects of global warming, preferring to believe that sea level will go up much more than current estimates predict, and that global warming will result in large increases in frequency, violence, or both of hurricanes as well as other large climatic changes, all of them adverse.

25 Comments:

I believe it was Law's Order where you laid out what I thought was an attractive alternative to class action law suits. I remember it involving the idea that torts would be transferable property, and that many people, if it could be shown that they were harmed by something like pollution, could sell their (probably small) claim to the tort to some company that specialized in suing other companies for creating these types of externalities. Do I have this right, and do you think this method would be at all effective in reducing the effects of global warming?

I think this 1 hour long video will challenge your assumption that global warming is an anthropogenic phenomenon: http://video.google.com/videoplay?docid=-4520665474899458831&q=great+global+warming+swindle&hl=en

As a personal global warming know-nothing, I found the movie quite enlightening. I was surprised, furthermore, that it was produced by the BBC.

The problem with carbon credits as currently implemented is they only address the demand side of the market. The supply side is little more than government fiat. There is no way for carbon credits to enter the market except by mandate to achieve some politically inspired target.

What if people could produce carbon credits? Plant a tree and that tree earns you X amount of carbon credits per year which you can sell on the market. The number of credits could be derived scientifically by calculating how much carbon the tree absorbs. At some point the tree could then be harvested for its wood (keeping the carbon locked in the wood).

This would put the entire carbon cycle in the market. We'd have carbon credit producers and consumers. Heck, people might plant and protect entire forests for the carbon credits.

Of course, with the entire carbon cycle in the market people would come up with innovative ways to remove carbon from the atmosphere to generate credits.

Environmentalists probably wouldn't be happy with that because people might innovate ways that don't save their trees.

1) pollution, global warming, whatever takes over the atmosphere.2) people build hermetic dome around cities because they need to, it may not be very expensive3) air is traded as a commodity with CO2/toxic pollution grades4) economic efficiency ensues

More seriously, I think the best way to go is negotiation between (armed) insurance companies and carbon emitters.

Sorry to post again. I really enjoy reading you Dr. Freedman both here and elsewhere. I have a feeling you learned well from your mother and father at the dinner table. I hope that is not to sycophantic.

Recent coversation with a catastrophy supporter shows just how far some are willing to go to save Gaia: "It's probably already too late but what Gore and most Greens suggest is sugarcoating and 'feel good' nonsense. America, as the leading emitter, has to cut it's CO2 emissions by at least 50% because China and India and Africa aren't going to go along with the program.That essentially means draconian rationing and prohibiitions. Start with a virtual ban on all leisure activities - such as NASCAR races, attending movie theaters, visiting national parks, non-essential air travel. Then mandate 3 13 hr. workdays, compulsory carpooling and complete shutdown of highways and electric generating plants on Sundays. Small nuclear plants will be constructed in every congressional district without regard to whose backyard they are in. Hopefully, America's sacrifice will inspire other nations to do the same. Should they not, and global warming continue, we may have to force other nations to comply through military means."

'The Great Global Warming Swindle' makes a few quite strong claims, for instance about the correlation between historical CO2 and temperature levels, and about which preceded what in particular.

I havnt been able to verify that though, but it should be easily debunkable if it isnt true. So someone better start debunking it really soon, or the expectation which i share with Mr. Friedman; that there probably is going to be a slight increase in temperature attributable to humans; is wavering.

Someone also makes a good point about temperature variance, which i discussed earlier with mr Huben, and gives an additional reason to believe its not going to increase, but actually decrease with higher global temperatures, meaning 'less extreme weather'.

In general i agree with Mr. Friedman when he says that global warming isnt going to be a very big deal, and i think its likely higher temperatures might actually very well be desirable. And thats not because i have any financial interest in big oil or somesuch: infact id rather be independant from fossile fuels yesterday rather than today, so that makes me one of the people for which the impending doom of catastrophic global warming would actually be a 'convienant truth'. Except for one detail: it doesnt seem to qualify for the 'truth' part.

There's also the standard observation, due to Coase, that "externalities" result from a conflict; we should have incentives for victims of global warming to reduce the cost they would incur from it.

I personally think government spending does as much or more damage than taxation, insofar as it is in the spending that the government takes real economic resources away from other potential uses. If I didn't believe, that, though, the fear the government would simply hang on to a Pigovian tax would not argue against it; the tax itself is moving us toward efficiency, whether or not distortive taxes are lowered.

You first need to separate "global Warming" from the "scientific evidence". The fact that the earth is warming may be a slam dunk -- but somewhat meaningless -- yet this is the focus of the true believers.

Does the "scientific evidence" proves anthropogenic sources -- No. And most of the scientific community is in agreement on that as well.

I would put the curent debate as the equivalent of many mathematicians watching me play blackjack. My expectation is somewhere between -.01 and +.01 -- but they don't know how to play, and haven't yet learned how to detect a skilled player. At the end of 5 hours play, I'm up 50 units. So they ALL agree that I'm winning. But, only SOME agree that I had any influence over the win.

I think that a tax would be a bad idea, but how about a requirement that carbon fuel sellers be required to buy the right to use an equivelent amount of CO2 scrubbing as done by plants?

In this case the farmers and owners of forests and so on have a perhaps annual assesement made of their CO2 scrubbing capasity, and can sell this to whom they choose, however if they sell the produce of their land as fuel, then they to must buy CO2 scrubbing capasity.

You can ramp this up so the economic dislocation is minimal. Say start with carbon fuel sellers being required to buy 5% scrubbing capasity the first year, then say for the next X years the amount of scrubbing capasity purchased as a percentage of goes up 1% a year, eventgually the percentage must be 100%.

I am surprised by your support of Pigouvian taxes in this, or indeed any, case.

It is my impression that a Pigouvian tax simply damages the economy twice. First, the damage is done by the externality. But on top of that, the equivalent amount of wealth is removed from the private economy to be spent by the government. For those who think that almost all government spending is inefficient, if not downright destructive, a Pigouvian tax simply adds insult to injury -- without in any way addressing the injury!

I know of only two ways that a Pigouvian tax can be truly efficient. The first, as you note, is if the tax is offset by cuts in less efficient revenue sources. The second you hinted at: Have the revenues used exclusively for direct transfer payments to those injured by the externality. In this way, the Pigouvian tax is brought to bear in a Coasian solution.

Nonetheless, in the main I share your skepticism that giving the governments of the world the tax and spend authority to try to prevent global warming will be any better than dealing with the global warming itself.

In earlier posts I argued that global warming is probably real, probably anthropogenic, and will probably impose real but not catastrophic, costs. This raises an obvious question: What, if anything, should we do about it?

If I were dictator of the world, the answer would be fairly obvious. Impose a tax on activities that create greenhouse gases designed to reflect the marginal cost they create. That's the standard economic solution, due to Pigou, for problems of negative externalities. Since the tax brings in additional revenue, combine it with a corresponding reduction in whatever taxes currently have the largest adverse effects.

I do not, in fact, support such carbon taxes. The reason is that I do not believe that, if imposed, they would fit the pattern described above.

To begin with, they would not be based on a realistic estimate of the marginal costs; insofar as they would be based on anything, judging by the ongoing arguments over Kyoto and similar proposals, they would be based on some target level of emissions. If, as seems likely, the level of taxes needed to substantially slow global warming was much higher than the marginal damage done, the result would be to buy lower temperature at a price much higher than it was worth, making the net situation worse, not better.

But this misrepresents the actual political process. Kyoto was expressed as target levels of emissions, but these targets emerged from a tension between the desire to mitigate global warming, or at least be seen as trying to do so, and the desire of the countries involved to keep costs to their citizens as low as possible. The targets of Kyoto may have been higher than marginal costs might dictate, but they rarely resulted in legislation at a national level that was as draconian as the targets would actually require. The actual level of expense US taxpayers seem to be willing to impose on themselves to reduce carbon emissions is closer to the Pigouvian or Lomborgian level than the harmful level that Friedman fears. It present, the level is closer still to zero.

I offer as further evidence the arguments I have been having over at Brian's "Backseat Driving" blog with people who are absolutely convinced that global warming would have catastrophic consequences but curiously unwilling to support that conviction with anything more than handwaving arguments. Judging by casual observation, they are the norm, not the outliers, of their movement.

That movement, however, does not occupy the center of gravity of the US political marketplace. They are no more representative of the median voter or legislator than do the people that claim for various reasons that no meaningful government action at all should be taken to address global warming.

Furthermore, I think it unlikely that income from carbon taxes would be used to reduce other taxes. The clear evidence here is the repeated pattern with regard to wars. New taxes are introduced as an emergency measure for a war, retained long after the war is over; there is always some politically profitable way to spend the money. In the case of carbon taxes, I am confident that they would be used as an additional source of revenue, perhaps with the argument that the money was needed to ameliorate the effects of whatever global warming continued to occur.

On the other hand, lower taxes are popular. Reagan didn’t wait for the end of the Cold War to cut taxes, nor did Bush wait until the end of his wars to do so. There are always politically profitable ways to cut taxes, even if you have to pass the bill on to future taxpayers to do it.

Finally, I suspect that widespread acceptance of the catastrophist view of global warming would result in quite a lot more than carbon taxes. It would provide a new justification for politically motivated interferences in a wide range of human activities. Anyone who questioned such policies would be labelled a denialist, accused of wanting Bangladeshis to drown and African children to starve. Again, look at the ongoing exchanges on Brian's blog.

Hence I conclude that serious efforts to combat global warming would have large costs, costs justified only if there were good reason to be confident that not taking such efforts would have catastrophic effects.

As I understand it, Friedman is arguing that a Pigouvian level of carbon tax: perhaps $10-20 a ton based on plausible discount rates, would be a good thing. However, he would not want to do this good thing, because it would enable catastrophists to sweep in and enact far more draconian levies, as well as giving them license to send the Energy Greenshirts in the middle of the night to tear our incandescent light bulbs from our cold dead hands.

He seems to be arguing that we should therefore prefer the status quo to a Pigouvian carbon tax, even though the result would be significantly greater economic damage to Bangladeshis and Africans than might be expected with a reasonable carbon tax. Given the level of poverty in those places, I would expect the economic damage to result in a higher death rate. I wouldn’t want to accuse David Friedman of wanting this outcome for Africans and Bangladeshis, but it seems to be the logical result of his argument.

"In earlier posts I argued that global warming is probably real, probably anthropogenic, and will probably impose real but not catastrophic, costs."

I've looked through your earlier posts on this, and while I see you have concluded that global warming is probably real and athropogenic I have not seen you offer actual scientific arguments for these conclusions.

Are your conclusions based not on science per se but rather on your assessment of which scientists are least biased?

If you are aware of strong scientific arguments for anthropogenic global warming could you point them out? I've been trying to find the best arguments but everything I've found so far seems obvioulsly deeply flawed.

I've corresponded with Mankiw on these issues at some length. Here is one relevant part of my response to his argument:

1. I wasn't making a slippery slope argument. If I had been, I would have argued that carbon taxes would initially be a good thing but would set the precedent for other bad things. In fact I argued that, as implemented, they would probably be a bad thing. As I made explicit in my post, it was a public choice argument--completely ignored in your response. I plan to send in my complaints to the Society for the Protection of Straw Men just as soon as I can find their email address.

2. My argument is consistent with my father's views. For evidence, take a look at the discussion of professional licensing in _Capitalism and Freedom_. The argument is not that professional licensing, applied by wise and benevolent officials, could do no good. It is that we can expect, on grounds of both theory and evidence, that professional licensing will usually be controlled by the profession and used to restrict entry and raise prices.

If you look again at the quote from him you link to, he isn't saying that one should recommend policies independent of how one thinks they will be implemented--consider the "in light of what can be done." Professional licensing that isn't captured can't be done, or at least not reliably done, on the evidence. He is saying that one shouldn't refrain from making a proposal merely because you think it can't be passed.

In this context, the implication is that one might argue that a specified form of carbon tax would be a good thing--and simultaneously that any carbon tax that could be passed would be a bad thing. I don't believe that is your position.

And, again:

can you see any hint of evidence that the people proposing cap and trade have made any effort to estimate marginal cost of reduction of carbon dioxide, optimal level of emission, or any of the information necessary for a scheme designed to actually produce net benefits?

Isn't that question relevant to how one can expect a carbon tax (or cap and trade) to be implemented, and isn't that relevant to whether one ought to be in favor of it?